Some forms of aid do more than others for economic growth
As traditional aid donor countries struggle with tight budgets, it’s useful to ask which kinds of aid do the most to stimulate economic growth in recipient countries. Kamiljon Akramov, senior researcher in IFPRI’s Development Strategy and Governance Division, examines this question in a recent book entitled Foreign Aid Allocation, Governance, and Economic Growth and an issue brief of the same name.
Akramov divides aid into three categories—economic, social, and other—and ranks each one’s effectiveness for raising economic growth. According to his breakdown, economic aid includes assistance for production in areas like agriculture, manufacturing, and trade, as well as for the construction of energy, road, communications, and financial infrastructure. Social aid consists of investments in sectors such as education, healthcare, sanitation, and drinking water. “Other” represents mainly emergency aid, which he argues was never really intended to foster long-term economic growth. “Obviously these different categories of aid may be unlikely to impact economic growth in the same way,” says Akramov.
Economic Aid Tops the List
Akramov found that economic aid generates the most immediate returns by generating growth in areas like agriculture and manufacturing. “This is important because increasing agricultural production may help to promote overall economic growth, reduce poverty, and improve food security in these countries,” he says. An almost equal—but less immediate—return can be seen when aid is funneled toward infrastructure, which can bolster a country’s capacity for production and reduce transaction costs for everyone along the value chain. Social aid, in areas like education, has the least impact on economic growth and makes a surprisingly limited contribution to human capital.
Why? Akramov recognizes that “social aid might affect economic growth by building additional human capital,” but surmises that education is enticing only if students can expect to find better jobs after they graduate. Without the economy to support a strong labor market, the incentive to seek education goes out the window.
From the early 1980s to the early 2000s, development aid moved away from investments in production and infrastructure—dropping almost 20 percent—and doubled in social interventions. The reasons are varied: agricultural failings made donors wary of investing in the sector, numerous crises required emergency responses, and geopolitical and commercial interests also played a role. Whatever the reason, Akramov’s study suggests that this evolution resulted in aid with less economic impact. Simply put, he says, “sectoral allocation of aid matters. Donors have to take these factors into account in making decisions about aid allocation.”